Is rolling your 401(k) money into IRA all that risky?

There’s a new study out from a federal government agency — the Government Accountability Office — that’s raising concerns about employees rolling money out of their 401(k) accounts when they leave an employer and having that money put into their own IRAs. According to a recently published article from Pensions & Investments:

“The bottom line is that we think a lot of people are making big decisions not on a sound financial basis, but on what’s easy,” Charles Jeszeck, GAO’s director of education, workforce and income security, said in an interview. “A lot of plans want to discourage separating employees from leaving their money with them, new employers don’t always want to accept it, and then, in between, you’ve got vigorous marketing efforts of IRA providers.”

The resulting report was “a wake-up call” for stronger consumer protections, said Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin, (D-Iowa). He and Sen. Bill Nelson (D-Fla.) and Rep. George Miller (D-Calif.), ranking member of the House Education and the Workforce Committee, prompted the inquiry.

So, according to the GAO, you and other folks who leave a company are taking the easy way out by rolling your 401(k) plan money into your own IRA. And, some politicians in Washington believe that the solution to this “problem” is more government regulation.

I respectfully disagree. Here’s why: 401(k) plans are employer-based retirement savings plans for the benefit of their employees. When you save money through such a plan, and then end up leaving the employer, for example for another job with a different employer, the money you saved in their 401(k) is your money. It’s not the employer’s money.

For folks who change employers every few years, you can end up with a lot of different retirement accounts scattered all over the place. An advantage of rolling the money into your own IRA is that you’ve got the money centralized in your one account.

Also, consider that in a typical 401(k) plan, you have a limited menu of investment options. With your own IRA, you have access to a large universe of investment options. The limited choices offered in a typical 401(k) plan isn’t all bad, though, when you consider that many folks are overwhelmed by all the choices most fund/brokerage companies offer for an IRA account.

In most 401(k) plans, the benefits department of the employer has done a reasonable job with screening and offering a short list of decent investments. There are exceptions where some 401(k) plan investments are laden with high fees or have sub-par performance (this typically happens due to biased recommendations from a commission-based broker). There also have been some famous disasters such as employers having their employees invest a lot in company stock and the stock ends up imploding (e.g., Enron). Of course, if you don’t do your homework or get bad advice for example from a salesperson, you can end up in lousy IRA investments.

From the employer’s perspective, if employees keep 401(k) accounts with them after leaving the company, it increases the administration and associated costs of the plan. Also, your new employer probably won’t want the hassle of having you roll your money from your previous employer’s 401(k) plan into their plan.

My bottom line on this issue is that I think the current system works pretty well and more government regulation isn’t going to improve things. The virtue of the current system is that employees generally have choices. Many employers allow you to roll money from your previous employer’s 401(k) plan into theirs, if you so desire.

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